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Sunday, December 18, 2011

Exporting Canadian Asbestos: A Reminder of Supply Chain Responsibility

Recently, two of Quebec’s asbestos mines shut down amid noisy political debates and a dramatic anti-asbestos news conference Thursday on Parliament Hill. I find this to be an interesting illustration of how fast-moving a relatively recent ballooning of criticism can turn into the dramatic stoppage of operations of an industry that has been left relatively untouched for years.

The growing interest was partly spawned by the Daily Show with Jon Stewart where Asaaf Manvi, one of the show’s correspondents, implicitly ridiculed Canada’s hypocrisy for exporting a substance (asbestos) that the country itself has banned in use domestically and is currently removing from federal buildings. What is more, Canada has fought tooth and nail any United Nations’ efforts to label asbestos a toxic substance, which would place a strong sanction against the use of asbestos in industrialized countries.

This is not unlike the long string of companies over the last two decades that have faced major public outcry and subsequent financial despair because they failed to take accountability for their supply chain. That is, companies think that the extent of their accountability is bound by their position in the supply chain rather than the actions of suppliers and customers that make up the supply chain.

Analogous to many CEOs and senior executives that have ignored the call for greater responsibility in the supply chain, Stephen Harper reacts to criticism by saying that the federal government’s actions are merely a response to global market forces. More specifically, if India is willing to purchase the product, we won’t stand in their way simply because they do not have the appropriate education and infrastructure in place to assure the substance’s safe handling, let alone the precautionary measures in place to withstand future exposure of the substance when buildings age and erode.

A very similar argument led to the boycott of Nike in the 1990s when then CEO Phil Knight argued that poor working conditions and penny wages in their supplier factories is not Nike’s concern and is merely a product of a global economic system. Company after company has fallen victim to "reacting" to criticism by arguing that what goes on in their supply chain is not their problem because they don't technically own those operations. Coca-Cola’s blatant disregard for killings in bottling factories, Apple’s disregard for suicides in its Foxconn factories, Hershey’s disregard for unfair treatment of cocoa farmers in Ghana, the list goes on and on. They typically begin with a reaction that absolves them of any responsibility. They then engage in a public relations campaign to distract the public from these problems before finally admitting that there is a problem and that they have to accommodate the requests put forward by activists and eventually the mainstream public. Unfortunately, companies do not engage in this “accommodative” stance until they’ve suffered financially or see fairly dramatic financial repercussions for not responding in a favorable way as determined by the public.

Why aren’t companies learning from other industries as they get lambasted in the form of heavy criticism? Is their memory that short? Is it a case of an evaluation of risk where they conduct a cost/benefit analysis of taking responsibility in the supply chain and comparing that with the potential implications of doing nothing? Is it the short-termism of the investor community that detracts from any consideration of longer-term financial implications?

Going back to the asbestos industry, the business community unfortunately operates under a very simplistic definition of value. Value, to economics and business, is the difference between the opportunity cost of holding on to the asbestos as an extractor (versus selling it) and the price customers are willing to pay for products that have asbestos in it. Notice that this definition is purely financial. That is, value is determined based on the cost of making the product and the cost of purchasing it. Nowhere in here is there room for calculating the erosion of value in terms of health or the environment.

So one answer to the above questions (why do managers continually fail to see the freight train associated with ignoring the supply chain), it becomes somewhat clear that managers are ill-equipped to incorporate social and environmental calculations into their decisions. And by ill-equipped I don’t only mean the skills required to understand the financial implications of these issues, I also mean the cognitive ability to first see their decisions in this way. So in effect, they cannot foresee that ignoring social and environmental considerations may someday influence how much a consumer is willing to pay for a product. Put another way, the executive is blind-sided by the perception that consumers only use financial-based variables in their purchasing decisions. But time and time again, firms have been railroaded for ignoring public perception on acceptable behaviour of business. Wouldn’t it be easier if consumers didn’t care about these sorts of issues?